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HUD and mortgage lender reach agreement on Montana fair lending complaint
On May 13, HUD announced an agreement with a mortgage lender to resolve allegations of Fair Housing Act violations. According to the redacted agreement, a complaint was filed with HUD last August accusing the mortgage company of engaging in housing discrimination based on race, in violation of the Fair Housing Act. The complainants claim they faced discriminatory housing terms, were denied housing, and were subject to racially discriminatory notices and advertisements. The mortgage company denied all allegations of discrimination, asserted its commitment to fair housing and equal opportunity, and agreed to a Conciliation Agreement to resolve the matter without admitting any wrongdoing or liability.
The mortgage company agreed to a $65,000 settlement and will commit to upholding its fair lending policies, ensuring applicants on Native American reservations are able to obtain residential mortgage loans without fear of discrimination based on race, color or national origin. Respondent will also contribute at least $30,000 towards initiatives designed to enhance housing conditions, financial literacy, and homeownership education for Native Americans near reservations. During the three-year term of the agreement, HUD may review compliance and conduct fair housing tests, among other oversight methods. The terms of the agreement also required the mortgage company to submit a training curriculum on its fair lending training courses for new employees and perform annual trainings with current employees; additionally, the mortgage company must submit an annual report on the mortgage company’s progress and performance in complying with the public interest provisions of the agreement. The agreement has been approved by the regional director of the Office of Fair Housing and Equal Opportunity.
FSOC releases report on nonbank mortgage servicing
On May 10, the Financial Stability Oversight Council (FSOC) released a report analyzing the growing nonbank mortgage servicing sector. The report discussed the sector’s significant market share, strengths and vulnerabilities particularly in financial stress scenarios. The FSOC emphasized the potential for these vulnerabilities to affect financial stability including income, balance sheets, and access to credit simultaneously, and the need for enhanced resilience measures. To combat these issues, the FSOC suggested a series of recommendations to promote safe and sound operations, address liquidity pressures in the event of stress, and ensure continuity of servicing operations.
The FSOC’s recommendations included urging state regulators to improve oversight and prudential standards, suggesting Congress grant FHFA and Ginnie Mae greater authority to enforce safety and soundness standards. Furthermore, the report suggested that Congress would authorize Ginnie Mae and encourage state regulators to share information with each other and with Council member agencies. The Council also recommended that Congress would consider legislation to provide Ginnie Mae with the authority to expand the Pass-Through Assistance Program into a more effective liquidity backstop for mortgage servicers participating in the program during periods of severe market stress. The report further proposed the creation of a fund to support servicing continuity in times of servicer failure, including loss-mitigation activities for borrowers and the advancement of monthly payments to investors.
The Director of the CFPB, Rohit Chopra, released a statement in response to the FSOC’s report. Chopra emphasized the importance of the mortgage market to the economy, and the significant role played by nonbank mortgage companies. He expressed concern about the lack of oversight of nonbanks in comparison to banks and said that the Bureau will soon propose a rule “to strengthen certain homeowner protections.” He also mentioned that regulators were concerned about nonbanks’ lack of supervision and sensitivity to market volatility given their often-limited cash reserves and heavy dependence on bank borrowing.
If a large nonbank mortgage company were to fail, Chopra said that borrowers could face chaos: payment issues, no customer service, and foreclosure risks, as well as generally limited access to credit, especially for low- and moderate-income households. Chopra also mentioned that the report does not discuss specific measures for addressing these risks within the FSOC and suggested appropriate tools for managing such risks will be a future effort. Chopra expressed concern that current rules do not sufficiently protect borrowers exposed to foreclosure and “junk fees” and stated that the CFPB will conduct a thorough evaluation to determine if any significant nonbank mortgage firms would meet the criteria for heightened supervision and regulation by the Fed as well as work on a proposed rule to mitigate losses by including foreclosure protections from the earliest stage of mortgage servicing, even if the servicer does not yet have all the documents.
Virginia amends its foreclosure procedures and requires an affidavit
Recently, the Governor of Virginia signed HB 184 (the “Act”) which amended the foreclosure procedures and subordinate procedures. Specifically, the Act added a requirement that if the proposed sale was initiated due to a default in payment under a security instrument, then the subordinate mortgage lienholder must submit to the trustee an affidavit affirming that monthly statements were sent to the property owner detailing any interest, fees, or charges assessed. The amendments also provided that the subordinate mortgage lienholder must provide a copy of such affidavit to the person who would pay the instrument with written notice for a request for sale. That notice must advise the person to pay the instrument if the person believed that fees or interest were assessed in error. If the court would agree, then the person will be entitled to recover attorney fees and costs against the subordinated mortgage lienholder after the date of the foreclosure sale. The Act also added a provision that any purchaser at a foreclosure sale provide certification that the purchase will pay off any priority security instrument no later than 90 days from the date that the trustee's deed conveying the property would be recorded in the land records. The Act will go into effect on July 1.
CFPB publishes the mortgage servicer edition of its Supervisory Highlights
On April 24, the CFPB published its 33rd edition of its Supervisory Highlights which covers select examinations and violations regarding mortgage servicing from April 1, 2023, through December 31, 2023. This edition of Supervisory Highlights focused on alleged violations of law identified in CFPB examinations including (i) charging illegal junk fees including impermissible property inspection and late fees; (ii) UDAAP violations; and (iii) violations of Regulation X loss mitigation requirements. The Bureau made clear in its press release that it plans to continue its focus on combatting junk fees within and beyond the mortgage servicing space.
The CFPB highlighted several violations of law resulting from mortgage servicers’ payment processing practices including the charging of property inspection fees in connection with certain Fannie Mae loans in violation of investor guidelines. To rectify this, servicers addressed system errors causing the fees in question, enhanced oversight, and were instructed to compensate affected borrowers. Other payment processing-related violations identified by the Bureau included failure to adequately describe fees in periodic statements by using the term “service fee” to describe 18 different fee types and failure to make timely disbursements from escrow accounts in violation of Regulation X.
The Bureau also identified unfair practices relating to the charging of late fees in excess of the amount authorized in the loan agreement or after consumers had entered into loss mitigation agreements, which should have prevented late fees. Servicers identified as having engaged in such violations were required to refund the fees to consumers and improve internal processes in response to the findings.
The CFPB also identified violations of law relating to loss mitigation and loan modifications. Examiners noted that some servicers failed to provide a written notice confirming the receipt of loss mitigation applications and informing consumers of whether the application was complete or incomplete. Further, some servicers failed to provide timely and complete notices of loss mitigation options. Additionally, some servicers, in violation of Regulation X, failed to waive existing fees after borrowers had accepted Covid-19 hardship loan modifications.
Examiners also found that certain servicers committed deceptive practices by sending out delinquency notices incorrectly stating that consumers had missed payments and needed to apply for loss mitigation when those consumers were actually up to date on their payments, enrolled in trial modification plans, or had inactive loans (such as those already paid off or in the process of a short sale).
Finally, the Bureau identified violations of law relating to (i) live contact and early intervention requirements in connection with delinquency and (ii) failure to retain adequate records.
FHFA seeks public input on new closed-end second mortgage product
On April 22, the FHFA sent to the Federal Register a notice of a proposed new product from Freddie Mac to begin purchasing certain single-family closed-end second mortgages. According to the proposal, Freddie Mac would purchase certain closed-end second mortgage loans from approved and active sellers and on properties for which Freddie Mac already owns the first mortgage, subject to additional product and term limitations. FHFA’s stated goal is to offer borrowers a second mortgage at a lower interest rate than other financing alternatives given the higher interest rate environment, and increased competition among second mortgage lenders. FHFA requested comments on nine questions, with comments to be received by May 22.
CSBS and FHFA sign agreement to enhance information sharing on nonbank mortgage companies
On April 10, the Conference of State Bank Supervisors (CSBS) and the FHFA announced they have signed a memorandum of understanding (MOU) to enhance information sharing on nonbank mortgage companies. The MOU reportedly aimed to improve the ability to coordinate on market developments, identify and mitigate risks, and ultimately, further protect consumers, taxpayers, and the nation’s housing finance system. CSBS Board Chair, Lise Kruse, emphasized the value of collaboration between state and federal regulators to support a stable mortgage marketplace, given the distinct authority each supervisory agency maintained over the nonbank mortgage industry. According to the CSBS, state financial regulators primarily oversee nonbank mortgage companies, while the FHFA regulated significant entities like Fannie Mae and Freddie Mac, which served as important counterparties to the nonbank mortgage industry. According to FHFA Director, Sandra L. Thompson, the new information sharing protocols will enable both state and federal regulators to supervise the mortgage industry more effectively, leading to improved outcomes for all stakeholders.
Kentucky enacts bills on mortgage liens and unlawful trade practices
On April 9, Kentucky enacted HB 488 (the “Bill”) which will establish when a county clerk admits any amendment, renewal, modification, or extension of a recorded mortgage to record. The Bill will also establish when a county clerk admits affidavits of amendment prepared and executed by an attorney to record. Additionally, the Bill will establish recording requirements and a section to establish when a promise, acknowledgment, or payment of money operates as an extension of a lien in a recorded mortgage or deed. Finally, the Bill establishes recording requirements for extensions on a lien in a recorded mortgage or deed.
On April 4, Kentucky also enacted HB 88 (the “Act”) which will amend provisions related to unlawful trade practices, prohibiting (i) entities that are not banks or trust companies from implying that they are engaged in banking or trust activities, and (ii) entities to use in their marketing materials the name, trademark, logo or symbol of any financial institution or similarly resembling any financial institution, with exceptions for permitted use or disclosure of non-consent.
The Act will also state that residential real property service agreements cannot give rise to rights or obligations lasting longer than two years after their effective date. Additionally, barring exceptions, service agreements cannot (i) be enforceable on future owners of interests in the residential real property or otherwise purport to remain attached to the property; (ii) create or impose a lien, encumbrance, or other real property interest on the residential real property; or (iii) require or permit recording of the agreement or any notice or memorandum of the agreement, among other things.
Kansas updates UCCC provisions including credit card surcharges
On March 29, the Governor of Kansas signed into law HB 2247, a comprehensive bill that updated UCCC provisions in an effort to regulate the credit industry more efficiently, and moved provisions from the UCCC to the Kansas Mortgage Business Act, among other things. The bill amended provisions relating to credit card surcharges—allowing retailers and other persons to impose a surcharge on a customer who uses a credit card payment if such retailer or person provided a clear and conspicuous disclosure of the surcharge amount at the point of entry or sale or in advance of the transaction. The bill nearly tripled the “threshold amount” on certain consumer loans and leases from $25,000 to $69,500. The bill also clarified license requirements, among other things. HB 2247 will go into effect on July 1.
Borrower’s RESPA claim stays afloat in District Court
The U.S. District Court for the Southern District of Ohio, Eastern Division, granted in part and denied in part defendant mortgage servicer’s motion to dismiss claims for RESPA Qualified Written Requests violations. Defendant approved plaintiffs for a trial payment plan for their mortgage loan. After plaintiffs completed that plan, defendants sent an initial modification agreement with a misspelled plaintiff name. Plaintiffs notified defendant of the error but continued making payments pursuant to the initial modification agreement. Defendant then sent a corrected version which plaintiffs signed, and defendants recorded with the Delaware County Recorder’s office. However, defendants did not update the new terms in its billing system and, after realizing the agreement contained terms different from what it intended, sent a third version of the modification agreement to plaintiffs with an adjusted principal balance and interest rate. Plaintiffs refused to sign the third modified agreement, and defendants refused to honor the recorded version or accept payments, stating that plaintiffs were in default on their mortgage.
In making its judgement, the court considered how defendant handled plaintiffs’ qualified written requests (QWR). Regarding defendant’s response to plaintiffs’ notice of error, plaintiffs claimed defendant did not conduct a reasonable investigation, inadequately explained the discrepancy between the modification agreements’ interest rates and fee charges to their account, and entirely ignored the change in principal balances between the initial and the recorded modification agreements. Defendant argued that its conclusion, that no enforceable loan modification existed, would not change had it conducted the investigation. The court found that defendant could not bypass its responsibility to conduct a reasonable investigation, and that defendant did not address the difference in principal balance between the initial and recorded modification agreements.
On the issue of defendant’s response to plaintiffs’ request for information (RFI), plaintiffs claimed defendant’s response did not address their claims of missing records, nor did it mention that such records were unavailable. Plaintiffs also claimed defendant failed to produce requested documents. Refuting defendant’s argument that plaintiffs did not “even hint” that they suffered damages from the RFI portion of the QWR, the court found that plaintiffs’ damages were legally cognizable. However, the court dismissed plaintiffs’ claim as to the RFI because it did not satisfy the necessary standing requirements.
OCC releases Q4 report on first-lien mortgage performance
On March 19, the OCC released a report on the performance of first-lien mortgages in the federal banking system during the fourth quarter of 2023. According to the report, 97.2 percent of mortgages included in the report were current and performing at the end of the quarter, which is a slight improvement from the fourth quarter of 2022, but also a minor decline from the third quarter of 2023. The report also shows
- a rise in the percentage of seriously delinquent mortgages compared to the previous quarter (1.2 percent in the fourth quarter compared to 1.1 percent in the third quarter), but this percentage has trended down since the fourth quarter of 2021 (when it was 2.3 percent);
- a decline in new foreclosures, with 8,320 new foreclosures in the fourth quarter of 2023, compared to 8,965 new foreclosures the previous quarter and a high of 19,524 new foreclosures in the first quarter of 2022;
- finalization of 7,382 loan modifications, which was less than the 7,436 modifications completed in the prior quarter. Eighty-seven percent of the modifications were “combination modifications,” which are modifications that incorporate more than one type of modification action to improve the loan’s affordability, such as an interest rate reduction and a loan term extension.
First-lien mortgages account for 22.2 percent of the total outstanding residential mortgage debt in the country, representing approximately 11.7 million loans with a combined principal balance of $2.9 trillion.